Thursday, January 3, 2013

One investment Malaysia did not need

COMMENT
Whoever assessed the criteria for giving Lynas Corp of Australia a
licence to operate a rare earths processing plant at Gebeng near Kuantan
did the area and the country a great disservice.

That decision
calls into question our processes for determining and evaluating foreign
investment options and requires that we make a complete overhaul here.
That will require a proper assessment of the economic and other benefits
weighed against potential detrimental effects from the investments in a
systematic, informed and transparent manner.

The
so-called Lynas Advanced Materials Plant has already been granted a
temporary operating licence on Sept 5 last year to begin operations
after phase 1 of the project was completed. Phase 2 is now being
undertaken which will double capacity to 22,000 tonnes of rare earth
materials.

Residents close to the area where the plant is
located attempted to get a court order to stop production but it was
turned down. Recently, a controversy emerged when some ministers said
that radioactive waste from the plant must be exported while Lynas itself denied that there was any such condition and maintains that its waste is not only safe but can be processed into useful by-products.

Now with Phase 1 already completed with an investment of over RM1
billion and the next phase being constructed, which will take total
investment up to RM2.5 billion, one can only expect that Lynas will
fight tooth and nail against any attempt to stop production, especially
since they appear to have received all approvals.

If
efforts to stop production by residents and others are successful, one
can expect that the government will have to pay a huge amount in
compensation to Lynas which may well be much more than the original cost
of investment of RM2.5 billion.

Unless Lynas obtained the
approval by improper means and this can be proved in court, it looks
like the only thing that the government can legitimately do, without
having to pay compensation, is to enforce the conditions under which
Lynas operates its plants.

But even here it is not clear what the conditions are and whether waste is supposed to be exported.

Capital-intensive operation

That is a rather bad and sad place to be in and if only the proposed
investment had been properly evaluated and assessed in the first place,
the current dilemma would not have arisen.

First, the
arrangement itself was cumbersome. Raw material is imported from
Australia and then processed into rare earth materials with the waste
material forever producing some radioactive emission. Proponents claim
the emission is negligible, opponents maintain otherwise.

But it
should be clear that any such arrangement would be fraught with safety
considerations and controversy when the plant was not built next to the
Australian mining facility already owned by Lynas. Was the investment so
necessary for Malaysia that it could pretty much ignore some of these
considerations and the controversy it was likely to generate?

According
to Lynas, foreign direct investment amounts to RM2.5 billion for the
project, operating expenditure per year is RM600 million, export revenue
is RM3 billion per year and some 360 jobs will be created.

But
of the RM2.5 billion in capital investment, the greatest portion is
likely to be sourced from overseas for the plant, with the local portion
being largely civil works. Thus the part that is likely to benefit the
domestic economy will be a lot less than RM2.5 billion.

And since this is a capital-intensive operation, capital allowances will last for years and Lynas probably won't pay taxesfor
12 years. Thus, although export revenue will amount to RM3 billion, all
these will accrue to Lynas with no revenue whatsoever for the
government.

Yes, operating expenditure is RM600 million a year
and will make a positive contribution to the economy but it is not
really all that big with many Malaysian companies which pay taxes
spending much more than that. And it creates just 360 jobs, which is
really tiny in the overall scheme of things.

A bad deal

So
do we need Lynas? No. It is Lynas that needs Malaysia, using cheap
infrastructure and wages and making use of tax breaks to produce rare
earths at a fraction of what it would cost to manufacture it in
Australia.

And in the process, Lynas has shifted all risk to
Malaysia for a resource which occurs naturally in Australia. Any which
way you look at it, Malaysia has been diddled and saddled with a burden
it did not really need.

The government needs to investigate how
it ended up making such a bad deal and to determine if there was any
wrongdoing here. If there was, it may be able to unwind the deal on that
basis. If not, then it will be yet another of those decisions which
will costs us billions of ringgit.

To ensure that we don't make
such needless and costly mistakes in future, we need to make a full
revamp of our investment decisions and ensure that due process,
including all necessary studies are done, before such decisions are
made.

P GUNASEGARAM has been a journalist and analyst for over 30 years. In the coming months, he will help set up KiniBiz, an independent business news portal, in a joint venture with Malaysiakini.